Income tax developments. This page provides generalized information and may not apply to you and should not be acted upon without specific professional advice. You should consult your tax adviser if you have any questions.

Tuesday, January 24, 2012

Now that both leading GOP candidates have released their 2010 income tax returns, here are links to them. Romney has released many more tax returns than Gingrich. Gingrich should have released his Gingrich Holdings S corporation tax return as well since most of his transactions are taking place there. He also did not release his Form 2210 for the underpayment penalty calculation.

While Gingrich paid over $8,000 to prepare his 2010 tax return, Romney appeared to have paid none. And that's probably because his CPA billed the fees to one of his businesses.

Romney deducted his self-employed health insurance premium of $14,176 on Schedule A instead of on line 29 of page 1 of his Form 1040, as allowed by law. Both Romney and Gingrich included a Schedule H for household employees.

Gingrich was not subject to the dreadful alternative minimum tax while Romney was.

Here is part of a transmittal letter of the report from the GAO to Senators Max Baucus, Orrin Hatch and Charles Grassley:

The Internal Revenue Service (IRS) receives a great deal of personal information about individuals and businesses. While taxpayers are required to provide this information to IRS under penalty of fine or imprisonment, confidentiality of information reported to IRS is widely held to be a critical element of taxpayers’ willingness to provide information to IRS and comply with the tax laws. As a general rule, anything reported to IRS is held in strict confidence—Internal Revenue Code (IRC) Section 6103 provides that federal tax information is confidential and to be used to administer federal tax laws except as otherwise specifically authorized by law.

Although tax information is confidential, nondisclosure of such information is not absolute. Section 6103 contains some statutory exceptions, including instances where Congress determined that the value of using tax information for nontax purposes outweighs the general policy of confidentiality. Since making amendments to Section 6103 in 1976, Congress has expanded the statutory exceptions under which specified taxpayer information can be disclosed to specific parties for specific purposes. Today, Section 6103 exceptions enable law enforcement agencies to use relevant tax information to investigate and prosecute tax and nontax crimes and allow federal and state agencies to use it to verify eligibility for need-based programs and collect child support, among other uses.

Periodically, new exceptions to the general confidentiality rule are proposed, and some in the tax community have expressed concern that allowing more disclosures would significantly erode privacy and could compromise taxpayer compliance. In evaluating such proposals, it is important that Congress consider both the benefits expected from a disclosure of federal tax information and the expected costs, including reduced taxpayer privacy, risk of inappropriate disclosure, and negative effects on tax compliance and tax-system administration. This guide, prepared at your request, is intended to facilitate consistent assessment of proposals to grant or modify Section 6103 exceptions. This guide consists of key questions that can help in (1) screening a proposal for basic facts and (2) identifying policy factors to consider.__________

The GAO report has five disclosure threshold questions:

Does the proposal have a clear purpose and description of how the tax information will be used?

Does the proposal consider reasonable alternatives?

Is the tax information accurate, complete, and current enough for the stated purpose?

Is the tax information to be disclosed relevant and the minimum needed to achieve the stated purpose?

Does the proposal address any other statutory, regulatory, or logistical issues necessary for its implementation?

And six policy factors:

What are the expected benefits of the proposal to disclose tax information?

What are the expected costs of obtaining and using the tax information to be disclosed?

What is the potential effect on privacy?

What risks of improper use or unauthorized disclosure does the proposal create and how well does the proposal address those risks?

Please click on the link above to see a sample copy of the 2011 Schedule E for rental properties. As you can see, the very first two questions on the form ask, "Did you make any payments in 2011 that would require you to file Form(s) 1099?(see instructions)" and "If “Yes,” did you or will you file all required Forms 1099?" Schedule C's questions are on lines I and J. Farms too are required to answer similar questions.

Forms 1099MIsc are required to be filed for any unincorporated service providers to whom you paid $600 or more in 2011. This includes, but not limited to gardeners, repairmen, property managers, cleaners, accountants and bookkeepers. For businesses, you may also have to send a 1099Misc to your landlord, unless you pay rent to a property manager or the landlord is a corporation other than an LLC.

Also, you should give your service providers a W-9 form to get his/her tax ID, either a social security number or an FEIN (federal employer tax ID number): http://www.irs.gov/pub/irs-pdf/fw9.pdf. There is no need to use the service providers' SSN if the service provider has an FEIN. Of course, if the service provider is a partnership, all you can get is the partnership's FEIN.

Forms 1099misc are also required for any trade or business operating in the form of a partnership, trust, or corporation, including non profit organizations.

Tax season is here again! While the filing deadline might be a couple of months away, this month you will receive all required third-party reporting documents: W2s, 1099s for interest and dividends, 1099s for nonemployee compensation if you are an independent contractor, 1099-Bs from your broker reporting proceeds from the sale of stocks and bonds, 1098s from your mortgage holder, K-1s from partnerships, S Corps, estates, and trusts. Hopefully, you’ve set up a file to store all these documents to make data gathering for tax preparation a snap. If not, now’s the time to create one.

Note that the due date for filing this year is April 17. If a tax due date falls on a weekend or a holiday, the next business day becomes the due date. This year April 15 is a Sunday and Monday, April 16 is a federal holiday so the due date falls on Tuesday, April 17. If you are unable to file by the deadline, you may obtain an extension to Oct. 15. Bear in mind that the extension is for filing, not paying. All taxes must be paid by April 17 otherwise you may suffer penalties and interest.

If you pay estimated tax payments throughout the year, the due date for your next quarterly installment for prepayment of 2011 income taxes is Tuesday, Jan. 17. Estimated tax payments for 2012 will be due on April 17, June 15, Sept. 17 and Jan. 15, 2013.

Beginning in 2011, brokerage firms are required to report to the IRS not only proceeds from sales of stocks and mutual funds, but also the cost basis of the investments that are sold. The IRS has designed a new Form 8949 for reporting capital gains and losses. A summary of the information listed on this form is carried over Schedule D. A couple of new columns are added to Form 8949 reporting – one for adjustments to basis (in case your broker has an incorrect figure) and one for coding the transaction to identify the type of sale.

Business mileage rates for 2011 were changed mid-year, so when calculating your mileage for 2011 use the rate of 51 cents per mile for miles driven up to June 30, 2011 and 55 ½ cents per mile from July 1 to Dec. 31.

Mileage rates for 2012 are as follows: 55 ½ cents per mile for business, 23 cents per mile for moving and medical, and 14 cents per mile for charitable purposes.

The temporary payroll tax cut has been extended to Feb. 29; employees will enjoy a continued savings of 2% of wages withheld for Social Security – from 6.2% to 4.2%. The Social Security wage base for 2012 is $110,100 up from $106,800 in 2011. Once your wages exceed this amount, Social Security will not be withheld but Medicare will continue to be withheld.

The self-employment health insurance deduction no longer offsets the self-employment tax. In 2010 only, self-employed workers were able to reduce the amount subject to self-employment tax on Schedule SE by the amounts paid for health insurance premiums. You can still take the deduction on Form 1040 as an adjustment to income.

Foreign financial assets are reported on a new Form 8938. The foreign asset disclosure form is separate and different from the foreign bank account report. Taxpayers with foreign assets may need to file both documents.

The first-time home buyer’s credit is now only available to members of the military or Foreign Service. If you are repaying the first-time home buyer’s credit, you may not need to complete and attach Form 5405.

Also gone for 2011 is the Making Work Pay Credit. For the past few years we enjoyed $400 per year single and $800 married filing joint credit against our tax liabilities.

The temporary regulations clarify and expand the standards in the current regulations under Secs. 162(a) and 263(a) and provide rules for applying these standards. They also provide guidance on accounting for, and dispositions of, property subject to Sec. 168 and amend the general asset account regulations.

Distinguishing between expenditures for capital improvements or for deductible ordinary repairs is a highly factual determination, and a number of court cases have set out tests for making the distinction. Because it has been difficult for taxpayers to apply the standards set out in case law, the regulations, and IRS guidance, the IRS issued proposed regulations in 2006 (later withdrawn) and 2008. Friday’s temporary and proposed regulations respond to comments received in response to the prior proposed regulations.

The temporary regulations provide a general framework for capitalization and retain many of the provisions of the 2008 proposed regulations, which in many instances incorporated standards from existing authorities under Sec. 263(a).

Among the changes introduced by the temporary regulations, they revise the rules for determining whether an amount is paid for an improvement to a building, and they revise the rule for determining whether an amount is paid for the replacement of a major component or substantial structural part of a unit of property. The temporary regulations also provide several new rules that were not in the 2008 proposed regulations.

Materials and Supplies

The temporary regulations generally retain the framework in the 2008 proposed regulations for materials and supplies. In response to comments, however, the temporary regulations modify and expand the definition of materials and supplies, provide an alternative optional method of accounting for rotable and temporary spare parts, and provide an election to treat certain materials and supplies under a de minimis rule in Temp. Regs. Sec. 1.263(a)-2T. The temporary regulations also allow a taxpayer to elect to capitalize certain materials and supplies.

Repairs

Under the 2008 proposed regulations, amounts paid for repairs and maintenance to tangible property are deductible if the amounts paid are not required to be capitalized under Regs. Sec. 1.263(a)-3. The temporary regulations retain this rule and clarify that a taxpayer is permitted to deduct amounts paid to repair and maintain tangible property provided such amounts are not required to be capitalized under Sec. 263(a) or any other provision of the Code or regulations.

Rentals and Leased Property

The temporary regulations make minor revisions to the rule in Regs. Sec. 1.162-11(b) that provides that the cost of erecting a building or making a permanent improvement to property leased by the taxpayer is a capital expenditure and is not deductible as a business expense.

The temporary regulations amend the rules in Regs. Sec. 1.162-11(b) and 1.167(a)-4 to provide that a lessee or lessor must depreciate or amortize its leasehold improvements under the cost recovery provisions of the Code applicable to the improvements, without regard to the term of the lease. They also remove the rules permitting amortization over the shorter of the estimated useful life or the term of the lease.

Amounts Paid to Acquire or Produce Tangible Property

The temporary regulations retain the rules from the 2008 proposed regulations on capitalization of amounts paid to acquire or produce units of tangible property. These include a general requirement to capitalize acquisition and production costs and a requirement to capitalize amounts paid to defend and perfect title to property. Responding to comments, the temporary regulations clarify how the rules apply to moving and reinstallation costs. They also retain the rule for costs incurred prior to placing property into service, add and clarify certain rules with respect to transaction costs, and modify and refine the de minimis rule.

The de minimis rule under the temporary regulations retains the requirement that a taxpayer may deduct certain amounts paid for tangible property if the taxpayer (1) has an applicable financial statement, (2) has written accounting procedures for expensing amounts paid for such property under certain dollar amounts, and (3) treats such amounts as expenses on its applicable financial statement in accordance with such written accounting procedures. However, the temporary regulations replace the “no distortion” requirement in the proposed regulations with an overall ceiling that generally limits the total expenses that a taxpayer may deduct under the de minimis rule.

Under the new criteria, the aggregate of amounts paid and not capitalized under the de minimis rule for the tax year must be less than or equal to the greater of (1) 0.1% of the taxpayer’s gross receipts for the tax year as determined for federal income tax purposes; or (2) 2% of the taxpayer’s total depreciation and amortization expense for the tax year as determined in its applicable financial statement.

Amounts to Improve Property

The temporary regulations retain the basic framework of the 2008 proposed regulations for determining the unit of property and for determining whether there is an improvement to the unit of property. They also retain many of the simplifying conventions set out in the 2008 proposed regulations, including the routine maintenance safe harbor and the optional regulatory accounting method.

The 2008 proposed regulations provided a safe harbor from capitalization for the costs of performing certain routine maintenance activities. Under the safe harbor, an amount paid was deemed not to improve the unit of property if it was for ongoing activities that a taxpayer (or a lessor) expected to perform as a result of the taxpayer’s (or the lessee’s) use of the unit of property to keep the unit of property in its ordinarily efficient operating condition. The activities count as routine only if, at the time the unit of property was placed in service, the taxpayer reasonably expected to perform the activities more than once during the class life of the unit of property. Despite receiving numerous comments on this safe harbor, the IRS has retained it in the temporary regulations, but it is modified so that it will not apply to buildings.

Accounting and Disposition Rules for MACRS Property

The temporary regulations also revise the rules for accounting for MACRS property (i.e., assets to which Sec. 168 applies) and the rules for determining gain or loss upon the disposition of MACRS property.

The temporary regulations eliminate group accounts, classified accounts, and composite accounts under Regs. Sec. 1.167(a)-7. Instead, each multiple asset account must include, in most cases, assets that have the same depreciation method, recovery period, and convention, and that are placed in service in the same tax year. The temporary regulations also provide rules for determining gain or loss upon the disposition of MACRS property that are consistent with the disposition rules under Prop. Regs. Sec. 1.168-6 of the proposed ACRS regulations.

Effective Date

The temporary regulations are generally effective tax years beginning on or after Jan. 1, 2012. A change to conform to the temporary regulations will be a change in method of accounting under Sec. 446(e), and, in general, a taxpayer seeking a change in method of accounting to comply with the temporary regulations must take into account an adjustment under Sec. 481(a). The IRS will provide procedures under which taxpayers may obtain automatic consent for a tax year beginning on or after Jan. 1, 2012, to change to a method of accounting provided in the temporary regulations.

Wednesday, January 4, 2012

As CPAs gear up for tax season, they’ll find the Form 1040 series for 2011 looking much the same as that of the previous year, but only because of Congress’ 11th-hour compromise late in 2010 to keep it so. Nonetheless, a number of new features affecting individuals and businesses, such as new information reporting forms, are debuting, so return preparers should be aware of developments in the past year that will affect 2011 tax returns.

For 2011 inflation-adjusted tax rates and updated amounts of various credits and other items, see the “Quick Guide” (click here to download). For inflation-adjusted items for the 2012 tax year, see the sidebar, “Looking Ahead to the 2012 Tax Year,” below.The most significant event affecting 2011 returns was the signing on Dec. 17. 2010, of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act), P.L. 111-312, which extended the ordinary income tax rates introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), P.L. 107-16, and the capital gain tax rates introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27. The Tax Relief Act also extended a large number of other expired or expiring provisions.

Many of the tax provisions enacted in EGTRRA and JGTRRA had been set to expire after 2010. The Tax Relief Act amended EGTRRA and JGTRRA to postpone the sunset of the affected provisions until after 2012 and extended many other provisions to 2011 or 2012.

PRACTICE AND PROCEDUREPTINs. This tax season is the second for which tax preparers must register with the IRS and obtain or renew preparer tax identification numbers (PTINs). The IRS required preparers who registered and obtained a PTIN for the 2011 filing season to renew it for 2012 by the end of 2011. For more on PTIN renewal procedures, see Tax Matters on page 60.

Mandatory e-filing. This tax season, the threshold above which preparers must e-file most individual and fiduciary income tax returns drops from 100 returns they or their firm reasonably expect to file during the year to 11. A transitional rule allowing return preparers to paper file upon written request from the taxpayer expired at the end of calendar 2011 (Notice 2011-27). EITC due diligence. The U.S.-Korea Free Trade Agreement Implementation Act, P.L. 112-41, increased the preparer penalty under Sec. 6695(g) from $100 to $500 for each failure to exercise due diligence with respect to the earned income tax credit. The higher penalty is effective for returns required to be filed after Dec. 31, 2011.

EXTENSION OF EGTRRA AND JGTRRA PROVISIONSTax rates. EGTRRA introduced a 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33% and 35%. Those changes were scheduled to sunset after 2010 so that in 2011 the 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%, respectively. With the Tax Relief Act’s postponement of the EGTRRA sunset, those rates are scheduled to continue through 2012.

Capital gains. In 2003, JGTRRA also lowered the capital gain tax rate to 15% (0% for taxpayers in the 10% and 15% ordinary income tax brackets). These rate changes also had been scheduled to expire after 2010. The Tax Relief Act’s postponement of JGTRRA’s sunset continues the lowered capital gain tax rate through 2012.

Itemized deductions and personal exemptions. The Tax Relief Act also extended EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout for two years through 2012.

PAYROLL TAX REDUCTIONFor 2011 only, the Tax Relief Act also reduced the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remained at 6.2%). The payroll tax reduction replaced the former making work pay credit, which expired at the end of 2010. However, while the making work pay credit was phased out for higher-income taxpayers, the payroll tax reduction applied to all workers who paid payroll taxes, regardless of income level, and should be reflected in box 4 on the taxpayer’s 2011 Form W-2, Wage and Tax Statement.

AMT PROVISIONSThe Tax Relief Act increased the alternative minimum tax (AMT) exemption amounts for 2010 and 2011 (also known as the AMT patch). For 2011, the amounts are $48,450 for unmarried individuals; $74,450 for married individuals filing jointly; and $37,225 for married individuals filing separately.

In addition, the Tax Relief Act extended through 2012 the 0% and 15% capital gain rates for the AMT; the AMT offset of the child tax credit; and the 7% AMT preference for excluded gain on the disposition of qualified small business stock. It also extended the offset of nonrefundable personal credits against the AMT, but only through 2011.

EXTENSION OF EXPIRED INDIVIDUAL PROVISIONSThe Tax Relief Act extended a variety of temporary individual tax provisions that had expired at the end of 2009 or were scheduled to expire at the end of 2010. They include tax credits, deductions and various tax incentives.

The temporary 100% exclusion of gain from the sale of certain small business stock under Sec. 1202, enacted by the Small Business Jobs Act of 2010, P.L. 111-240;

The deduction for tuition and related expenses (Sec. 222);

The state and local sales tax deduction (Sec. 164);

The deduction for elementary and secondary school teachers (Sec. 62(a)(2)(D));

The nonbusiness energy property credit (under the rules in effect before the American Recovery and Reinvestment Act of 2009, P.L. 111-5) (Sec. 25C);

The credit for first-time Washington, D.C., homebuyers (Sec. 1400C); and

The special rules for qualified conservation contributions by individuals (Sec. 170(b)(1)(E)).

HEALTH CARE TAX PROVISIONSAlthough most of its major provisions will take effect in subsequent years, the health care reform legislation passed in 2010 contained some provisions that were effective in 2011.

Employees may see some new information on their Forms W-2 for 2011. The Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. This provision was originally mandatory for tax years beginning after Dec. 31, 2010; however, in Notice 2010-69, the IRS announced that employers will not be required to report the cost of employer- sponsored coverage on W-2s issued for 2011, due to the difficulty in preparing payroll systems for the requirement. However, employers have the option to report such costs in 2011, so some employees may see this information. It will appear in box 12 of the W-2, with a code DD. This reporting is strictly informational; the amount reported will not affect the individual’s tax liability.

Tax on HSA distributions. The additional tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses was increased to 20% of the disbursed amount, effective for disbursements made during tax years starting after Dec. 31, 2010. (Under prior law, the tax was 10% of the disbursed amount for HSAs and 15% for Archer MSAs.)

SIMPLE cafeteria plans. Starting in 2011, small businesses could start offering SIMPLE cafeteria plans. Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

BUSINESS PROVISIONSSelf-employment. The self-employment tax rate for 2011 dropped from 15.3% to 13.3%, reflecting the one-year cut in the Social Security tax also applicable to employees. However, taxpayers taking the above-the-line deduction for one-half of self-employment tax can still claim the same 7.65% amount as in 2010—making the deduction equal to 57.51% of self-employment tax for 2011. However, a provision that for 2010 allowed self-employed individuals to deduct health insurance premiums from self-employment income for purposes of determining self-employment tax (Sec. 162(l)(4)) was not extended for 2011.

Depreciation. Property acquired and placed in service between Sept. 9, 2010, and Dec. 31, 2011, may be eligible for 100% depreciation.

Work opportunity tax credit. Employers who hire certain military veterans, young people and members of other targeted groups by Dec. 31, 2011, may claim a credit based on the employee’s wages (Sec. 51).

NEW INFORMATION REPORTING PROVISIONSStock basis reporting. Individual taxpayers should also see more information on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which has been expanded to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stockbrokers and mutual fund companies will use Form 1099-B to report this information at year-end. They will also use the expanded form to report whether gain or loss realized on these transactions qualifies as long-term or short-term gain or loss. The payer is required to file the expanded Form 1099-B with the IRS by Feb. 28, 2012 (or April 2, 2012, if the payer files electronically) and provide it to investors by Feb. 15, 2012. Box 3 will show the cost or other basis of securities sold.

Credit card transactions. Beginning with calendar year 2011, payment settlement entities for traditional and online merchants will be required to report to a payee, as well as to the IRS, the gross amount of the payee’s reportable payment transactions within a calendar year. The payee is the party that accepts a payment card as payment or establishes an account with a third-party settlement organization to settle transactions. In a payment card transaction, the payee is generally the merchant or seller. This provision was enacted as Sec. 6050W by the Housing and Economic Recovery Act of 2008, P.L. 110-289, but became effective only in 2011. These payments are reported on Form 1099-K, Merchant Card and Third Party Network Payments, which may be furnished electronically.

The IRS in Notice 2011-89 provided transitional relief for 2012 from penalties under Secs. 6721 and 6722 for Forms 1099-K that are incorrect or incomplete, as long as the payer makes a good-faith effort to file and issue them correctly. The IRS also postponed until 2013 backup withholding with respect to amounts reportable under Sec. 6050W (Notice 2011-88). Form 1040, schedules C and E for 2011 tax years includes a line for payee taxpayers to report amounts reported to them on Form 1099-K, but the schedules direct taxpayers to enter a zero on the line.

Basis of inherited property. While most commentary and guidance has focused on the changes in estate and gift taxes for 2010 and 2011 as they relate to gift and estate returns, CPA practitioners may see effects of the 2010 modified carryover basis election on capital gains for 2011 reported by inheritors of the estates of 2010 decedents that made the election. Under these rules, the heirs receive inherited property with a basis equal to the lesser of the decedent’s basis or the property’s fair market value (FMV) as of the date of death (Sec. 1022(a)), plus any basis increase (up to the FMV of the property at the decedent’s date of death) allocated to the property by the executor of the estate.

The maximum amount of basis increase that the executor can allocate among all of the decedent’s assets is $1.3 million ($60,000 for estates of nonresidents who were not citizens), plus certain losses and loss carryovers of the decedent. Property transferred outright to the decedent’s spouse and qualified terminable interest property is eligible for an additional $3 million of basis increase. If the executor has made the Sec. 1022 election, the heir should receive from the estate a Form 8939, Schedule A, containing information about the property’s basis, date acquired, whether any gain on its sale would be ordinary, the amount of basis increase allocated to it and its FMV on the decedent’s date of death.

Individuals who inherited property from 2010 decedents may have already disposed of it before the estate made the carryover basis election and assumed that their basis was the FMV at the time of death. The estate’s subsequent election to apply the modified carryover basis rules may result in such individuals’ owing capital gain tax, due to the now lower basis of the property. The IRS has said that, in such cases, it will presume the recipient’s reasonable cause and good faith for any increase in the recipient’s tax liability due to the application of Sec. 1022 and will not impose failure-to-pay or accuracy-related penalties (Notice 2011-76). The IRS advises affected taxpayers to write at the top of an amended return “IR Notice 2011-76” to obtain the relief.__________

Looking Ahead to the 2012 Tax YearThe IRS made inflation adjustments to the income tax tables and many tax credits and other items for tax years beginning in 2012 in Rev. Proc. 2011-52.

Separately, the IRS announced the 2012 contribution limits and other figures for pension plans and other retirement-related items (IR-2011-103).

The increases are greater than in the previous two years, when inflation was lower.

Besides revised income tax tables, the new revenue procedure included updated amounts for various items such as the personal exemption (which increases from $3,700 to $3,800) and standard deduction. The revenue procedure also gave new figures for the child tax credit, American opportunity and lifetime learning credits and the earned income tax credit—40 items in all.

The $13,000 annual gift exclusion is unchanged for 2012, although the estate and gift lifetime exclusion for decedents dying during 2012 goes up from $5 million to $5.12 million.

The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b) or 457(b) plans and the federal government’s Thrift Savings Plan increases from $16,500 to $17,000. The catch-up contribution limit under those plans for those age 50 and over is unchanged at $5,500.

The Social Security Administration announced that the Social Security wage base for 2012 is $110,100 (up from $106,800 in 2011).__________

Expanded Toolkit Offers 360 Degrees of Outreach Resources, 365 Days a YearIn the midst of a difficult economy, and facing potential consumer confusion in the wake of the registered tax preparer program, firms of all sizes are confronting the dual challenge of holding on to current clients while successfully landing new ones.

To help CPAs meet these challenges and differentiate themselves from other tax preparers, the AICPA is building on a multiyear marketing and client-retention campaign launched in 2010 to assist members with their marketing and client-retention efforts. This year, the AICPA is expanding the toolkit to include materials to help CPAs explain and promote their value to clients.

“Many CPAs aren’t used to actively promoting themselves,” said Edward Karl, AICPA vice president–Tax. “In today’s climate, CPAs can’t afford to miss any opportunity to solidify their practices and build on their strengths.”

The enhanced toolkit includes customizable materials that allow members to reach clients and prospective clients from many different angles. These include short articles and concise, impactful messages for firm newsletters, sample social media posts and tax brochures that CPAs can use to stay connected with current clients and enhance client-retention efforts.

For potential clients and referral sources, tools such as a “Tax Saving Strategies” presentation provide a framework for in-house meetings and presentations to outside groups. CPAs can use them to highlight specific tax updates for 2012, while also incorporating the underlying message of how a CPA can add value.

One important feature of the toolkit is that many of the materials can be tailored for use by firms of different sizes. The importance of this is reflected in the results of the 2011 PCPS CPA Firm Top Issues Survey–growth and client retention clearly are on every firm’s agenda.

“We are sensitive to the fact that how firms attract and retain clients will vary by firm size,” explained Mark Koziel, AICPA vice president–Firm Services & Global Alliances. “We will be taking this into account in the development of these resources in order to better meet the needs of our members.”

Just as important, the toolkit has been designed with a busy, multitasking end user in mind. It comes with tips on making the best use of each resource and features an implementation checklist for incorporating the materials into a firm’s overall client-retention and acquisition strategies.

The AICPA is taking a direct role in getting the word out. “We’re here to support our members, and again this year, one of the things that means is continuing our advertising campaign,” said Jim Metzler, AICPA vice president–Small Firm Interests. “We’re placing radio spots and Web banners, using messages consistent with the materials we’re including in the toolkit that educate our audience on the value of working with CPAs and their distinguishing qualifications.”

Those efforts continue all the way through to the 360 Degrees of Taxes website: 360taxes.org. This public service resource is an extension of the 360 Degrees of Financial Literacy site. It has a more specific focus on supporting the position of CPAs as the premier providers of tax services, as well as enabling interaction with consumers throughout the year. The site serves as a forum for addressing individual tax questions and needs, a place to educate the public on the differences between CPAs and registered tax return preparers, and a guide pointing visitors toward a CPA in their local community.

Tuesday, January 3, 2012

If you are in good health, have enough money and your parents and other relatives have good longevity, you may want to consider delaying collecting your Social Security benefits as each year you delay collecting your benefits, you will get 8% higher in benefit payment, until you reach age 70. For example, if your benefit at full retirement age of 66 is $1,000 per month, by delaying to age 70, you will get $1,320 per month. At age 68, you will get $1,160 each month for the rest of your life. This is especially beneficial if your spouse will be collecting half of your Social Security.

With the ringing in of the new year, several new tax provisions took effect. http://www.blogger.com/img/blank.gifhttp://www.blogger.com/img/blank.gifWhile the list of new items does not compare with the number of tax provisions that expired at the end of 2011 (see “Many Tax Provisions Set to Expire at Year-End”), practitioners should be aware of what has changed.

Inflation Adjustments

The applicable amounts for many tax items increased on Jan. 1, due to annual inflation adjustments. Revised tax tables are in effect, as well as an increahttp://www.blogger.com/img/blank.gifsed personal exemption amount (now $3,800) and standard deduction amounts. Various credits and other items also were adjusted (see Rev. Proc. 2011-52). Contribution limits and other amounts for pension plans retirement accounts were also changed for 2012 (see IR-2011-103). The Social Security wage base for 2012 is $110,100.

The standard mileage rate for business use of an automobile remains at 55½ cents per mile for 2012; for medical and moving expenses it decreases to 23 cents per mile (Notice 2012-1), down a half-cent from the second half of 2011.

Capital Gain and Loss Reporting

Taxpayers will have to report new information on Form 1040, Schedule D, Capital Gains and Losses, and file a new form, Form 8949, Sales and Other Dispositions of Capital Assets, to report gains and lhttp://www.blogger.com/img/blank.gifosses of certain capital assets. The information on Form 8949 will correspond to the new information being reported on 2011 Forms 1099-B, Proceeds from Broker and Barter Exchange Transactions.

Under Sec. 6045, as amended in 2008, brokers are required to report to the IRS and their customers the customers’ adjusted basis in securities sold and to classify the customers’ gain as long term or short term. This basis reporting applies to covered securities acquired in 2011 and later (certain corporate stock in 2011 and other securities starting in later years; see Sec. 6045(g)(3)(C)).

Individuals will be required to report both short-term and long-term gains and losses of capital assets in the following three situations:

The information from Form 8949 must then be transferred to Part I of Schedule D, which has been redesigned for 2011.Veterans Work Opportunity Credits

The Three Percent Withholding Repeal and Job Creation Act, P.L. 112-56, extended the work opportunity tax credit (now called the returning heroes and wounded warriors work opportunity tax credits) for businesses that hire certain military veterans. Employers will be eligible for a credit of up to $9,600 for each qualified veteran that they hire after the law’s enactment date (Nov. 21, 2011) and before Jan. 1, 2013.

Under the returning heroes tax credit, an employer may be eligible for a credit of up to $2,400 for hiring a veteran who has been unemployed for at least four weeks and up to $5,600 for hiring a veteran who has been unemployed for more than six months. Under the wounded warriors tax credit, an employer may be eligible forhttp://www.blogger.com/img/blank.gif a credit of up to $9,600 for hiring a veteran with a service-connected disability who has been unemployed for more than six months and up to $4,800 for hiring a veteran with a service-connected disability (who does not meet the returning hero credit requirements) or who qualifies as a food stamp recipient.

Foreign Asset Reporting

Under the Foreign Account Tax Compliance Act, individuals are required to report interests in specified foreign financial assets when filing their federal income tax returns (Sec. 6038D). This requirement was suspended until the Form 8938, Statement of Specified Foreign Financial Assets, was released (Notice 2011-55). The IRS posted the final version of the form and its instructions in December; taxpayers subject to the reporting requirement must file the form in 2012 for 2011 tax years. In addition, taxpayers who would have been required (except for the suspension of the requirement) to file Form 8938 in 2011 for a tax year that began after March 18, 2010, must file it for the prior year with their return for the current tax year.

Bonus Depreciation

The 100% first-year bonus depreciation provision expired on Dec. 31, but 50% bonus depreciation is available for property placed in service in 2012. (100% bonus depreciation does still apply in the case of certain longer-lived and transportation property placed in service before 2013.)

Estate Tax

Estates of decedents who died in 2010 have until Jan. 17, 2012, to elect not to have the estate tax apply and to have heirs’ bases in assets they inherit http://www.blogger.com/img/blank.gifhttp://www.blogger.com/img/blank.gifdetermihttp://www.blogger.com/img/blank.gifned under the modified carryover basis rules in Sec. 1022. This election is made by filing Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent. (For more on the Form 8939 requirements, see Cantrell, “Preparing and Filing Form 8939,” The Tax Adviser, November 2011.)

The estate and gift tax lifetime exclusion increases to $5.12 million for 2012.

EITC Due Diligence

The penalty for failing to meet the Sec. 6695(g) earned income tax credit (EITC) due diligence requirements increased from $100 to $500, effective for returns required to be filed after Dec. 31, 2011.Voluntary Classification Settlement Programhttp://www.blogger.com/img/blank.gifA new voluntary classification settlement program (VCSP) introduced in September (Announcement 2011-64) allows eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes for future tax periods while receiving relief for part of the tax liability relating to the past treatment of the workers as nonemployees. Taxpayers are eligible if they have consistently treated the workers as nonemployees, filed all required Forms 1099 for the previous three years, are not currently under IRS audit, are not currently under audit by the U.S. Department of Labor or a state agency, and complied with the audit results if the taxpayers were previously audited by the IRS or the Department of Labor.

The VCSP limits the tax liability to 10% of the employment tax liability that would have been due on the compensation paid to the workers in the most recent tax year, as calculated under the reduced rates of Sec. 3509. Interest and penalties are not charged on the liability.

The classification of these workers for prior years is not subject to an employment tax audit, but the statute of limitation on assessment of employment taxes is extended from three to six years for the first, second and third calendar years beginning after the date the taxpayers begin treating the workers as employees under the VCSP closing agreement.

Monday, January 2, 2012

WASHINGTON – Baby boomers take note: Medicare as your parents have known it is headed for big changes no matter who wins the White House in 2012. You may not like it, but you might have to accept it.

Dial down the partisan rhetoric and surprising similarities emerge from competing policy prescriptions by President Barack Obama and leading Republicans such as Wisconsin Rep. Paul Ryan.

Limit the overall growth of Medicare spending? It's in both approaches.

Squeeze more money from upper-income retirees and some in the middle-class? Ditto.

Raise the eligibility age? That too, if the deal is right.

With more than 1.5 million baby boomers a year signing up for Medicare, the program's future is one of the most important economic issues for anyone now 50 or older. Health care costs are the most unpredictable part of retirement, and Medicare remains an exceptional deal for retirees, who can reap benefits worth far more than the payroll taxes they paid in during their careers.

"People would like to have what they used to have. What they don't seem to understand is that it's already changed," said Gail Wilensky, a former Medicare administrator and adviser to Republicans. "Medicare as we have known it is not part of our future."

Two sets of numbers underscore that point.

First, Medicare's giant trust fund for inpatient care is projected to run out of money in 2024. At that point, the program will collect only enough payroll taxes to pay 90 percent of benefits.

Second, researchers estimate that 20 to 30 percent of the more than $500 billion that Medicare now spends annually is wasted on treatments and procedures of little or no benefit to patients.

Taken together, that means policymakers can't let Medicare keep running on autopilot and they'll look for cuts before any payroll tax increases.

Privatization is the biggest divide between Democrats and Republicans.

Currently about 75 percent of Medicare recipients are in the traditional government-run, fee-for-service program and 25 percent are in private insurance plans known as Medicare Advantage.

Ryan's original approach, part of a budget plan the House passed in the spring, would have put 100 percent of future retirees into private insurance. His latest plan, developed with Sen. Ron Wyden, D-Ore., would keep traditional Medicare as an option, competing with private plans.

Older people would get a fixed payment they could use for private health insurance or traditional Medicare. Proponents call it "premium support." To foes, it's a voucher.

Under both of Ryan's versions, people now 55 or older would not have to make any changes. GOP presidential candidates Mitt Romney and Newt Gingrich praise his latest plan.

How would it work? Would it save taxpayers money? Would it shift costs to retirees as Ryan's earlier plan did? Would Congress later phase out traditional Medicare? Those and other questions must still be answered.

"I'm not sure anybody has come up with a formula on this that makes people comfortable," said health economist Marilyn Moon, who formerly served as a trustee helping to oversee Medicare finances.

White House spokesman Jay Carney says the Wyden-Ryan plan "would end Medicare as we know it for millions of seniors," causing the traditional program to "wither on the vine."

But what administration officials don't say is that Obama's health care law already puts in place one of Ryan's main goals by limiting future increases in Medicare spending.

Ryan would do it with a fixed payment for health insurance, adjusted to allow some growth. In theory that compels consumers and medical providers to be more cost-conscious. Obama does it with a powerful board that can force Medicare cuts to service providers if costs rise beyond certain levels and Congress fails to act.

Like several elements of Obama's health care overhaul, the Independent Payment Advisory Board is in limbo for now, but it is on the books. If the board survives Republican repeal attempts, it could become one of the government's most important domestic agencies.

The White House wants to keep the existing structure of Medicare while "twisting the dials" to control spending, said a current Medicare trustee, economist Robert Reischauer of the Urban Institute think tank.

Ryan's latest approach is arguably an evolution of the current Medicare Advantage private insurance program, not a radical change, Reischauer said. That's particularly so if traditional Medicare remains an option.

"In the hot and heavy political debate we are in, participants are exaggerating the difference between the proposals," he said.

During failed budget negotiations with Republicans last summer, Obama indicated a willingness to make more major changes to Medicare, including gradually raising the age of eligibility to 67, increasing premiums for many beneficiaries, revamping co-payments and deductibles in ways that would raise costs for retirees, and cutting payments to drugmakers and other providers.

"I was surprised by how much the president was willing to offer in terms of Medicare changes without a more thorough vetting and discussion," said Moon. Obama sayshttp://www.blogger.com/img/blank.gif he will veto any plan to cut Medicarhttp://www.blogger.com/img/blank.gife benefits without raising taxes on the wealthy.

Democrats are still hoping to use Ryan's privatization plans as a political weapon against Republicans in 2012, but the Medicare debate could cut both ways. For the 76 million baby boomers signing up over the next couple of decades, it will pay to be watching.

About Me

Born and raised in Hong Kong. Moved to Sacramento, CA in 1968 to attend college.

Recent travel destinations include Antarctica Peninsular, Arctic Svalbard; Churchill, Manitoba; Machu Picchu; Shanghai; river cruise from St. Petersberg to Moscow; river cruise from Nanjing to Chongqing; plus various national parks.

My first SLR camera is a Minolta SRT-101 and my latest camera is a Nikon D300.